3.
2 LAW OF DEMAND
WHAT IS LAW OF DEMAND?
The law of demand expresses an inverse relationship between price
and quantity demanded, when other determinants of demand remain
constant It is but natural to consume more during a fall in the price and
consume less when price rises. This natural response of consumers to
price variations is presented in the form of law of demand. The law of
demand is also called the first law of purchase.
The law of demand shows the direction in which the quantity demanded
moves with a change in a price. Symbolically law of demand can be
shown aS
QD f(P)
Where QD refers to quantity demanded and P for price. The law can
be explained in these words:
Under the same conditions of demand, the quantity of a commodity
bought tends to vary inversely with its price. At a higher price less of the
commodity would be purchased and at a lower price more of it would be
brought, provided the conditions of demand remain unchanged.
Dr. Alfred Marshal was one of the chief advocates of the law of
demand. According to him, "the amount demanded increases with a
fall
in price and decreases with a rise in price".
The law of demand is based on the famous assumption of ceteris
paribus which implies constancy in other determinants of demand.
Marshall's utility analysis of demand makes seven
important assumptions.
Constancy in the determinants other than price.
Constant marginal utility of money.
Cardinal measurement of utility.
Rationality on the part of the consumer.
Consumer can not influence price.
Consumer does not expect price change.
Consumer does not go in search of a substitute good.
Demand Schedule & Curve
Lawof demand can be explained with the help of a demand schedule
A demand sch
Ademand chedule is a list of the quantities purchased or demanded at
various prices. Demand schedule represents a functional relationship
between price and quantity demanded. A demand schedule is presented
helow to explain the law of demand [Table 3.1]
Table 3.1 Demand Schedule
Price Quantity Demanded
6 02 Mangoes
T5 04 Mangoes
74 06 Mangoes
3 08 Mangoes
2 10 Mangoes
1 12 Mangoes
Other things remaining the same, when price is high, quantity
demanded is less and vice versa. In the example given, when price is Rs
6 mangoes demanded are 2. Quantity demanded goes on increasin9
12 mangoes
along with a fall in the price. When the price is one Rupee,
are demanded. The consumer purchases more with a fall in a price, as it
with rise in price,
nereases his purchasing power. He purchases less
a
as his purchasing power decreases
This demand schedule be represented in the form of a
can
deman
and
curve. A demand curve is the graphical explanation of law of
demaned
(Fig 3.6)
2
10
1
12
4 6 8 10 12 14 X
Quantity Demanded
Fig. 3.6: Law of Demand
Along OX axis quantities demand (mangoes) are measured
and alona
OY arises prices are measured. When
perpendiculars are drawn from the
points indicating quantities on OX axis and correspondin9 prices
on Ov
axis, the meeting points on these perpendiculars will be on
curve DD
This is the demand curve for mangoes under the conditions
representes
by a particular demand schedule.
Law
Exceptions to the 'Such cases
certain exceptions
to the law of demand. n
There are
not applicable, are called exceptions to the
which the law of demand is
law. They are the following:
England, for the first time
1. Giffen Paradox: Sir Robert Giffen of
found out an abnormal situation in which quantity demanded increases
when the price rises. It is an exceptional situation in which the demand is
strengthened with a rise or weakened with a fall in price. It is called Giffen
paradox
19th century price of bread in England increased because of
in the
nation wide famine. But the demand for bread
did not decline. Instead it
saw an
increasing trend. Giffen conducted a study of this situation and
came to know that certain
necessaries were not subject the
the law of demand. When the operation of
price of bread increased, people reduced
the consumption unnecessary things and diverted
of
the purchase of their resources for
bread. This made the demand for bread
trend even with an increase to see a rising
in price. This is
3.7) called Giffen Paradox
(Fig
DD denied curve
slopes upwards to right indicating
during a price rise. It marks an more
purchase
an exceptional demand curve. exception to the law of
demand. So DD is
D
G i f f e nG o o d
D
-X
Quantity Demanded
Fig. 3.7: Exceptional Demand Curve
Prof. Benham has further illustrated Giffen paradox. According to
Benham people purchase more with an increase in the price under four
circumstances
I f the commodity in question is necessary of life,
I f a serious shortageiffeared.
If the price variation is very small and
If the consumers are rich.
2. Veblen Effect: Thomstein Veblen (1857-1929) observed another
exception to the law of demand in his doctrine of conspicuous
consumption. According to Veblen the law of demand does not apply to
Commodities having prestige value or status symbol. Some commodities
are bought not for having intrinsic worth, but because their possession
Confers a social distinction on the holder. For example, gold, precious
metals, refrigerator, diamond and the like have status symbol. Their
purchase is not subject to the operation of law of demand.
3. Speculative Effect: Law of demand is not applicable' to speculative
market. Shares, debentures, stocks etc., are dealt with in the speculative
market. An increase in the price of share is an indication of increased
dividend.Profit maximisation makes the consumers to purchase more
when the price is high.
4. Cosmetics: Modem civilization made cosmetics a necessary. Even
if theprices of the cosmetics increase, their demand will not decrease
because the civilians consider them as necessaries. So cOsmetics are
exceptions to the law of demand.
5. Economic Fluctuations: The
law of demand is not
during economic fluctuations. During inflation, which is
applicable
characterised by
shortage of goods and serves and increased money
not decrease. supply, demand will
During deflation, though the price is low,
will not increase because of lack quantity demanded
of
purchasing power.
The law of demand is universal with
some
is a guide to determine exceptions. Law of demand
price and production quantity. It is
basic laws of economics. one of the
